Wednesday, September 1, 2010

Health Care is Divisible

Cross-posted from The Agenda on National Review Online.


Earlier this week, I posted a lengthy critique of Ken Arrow’s thesis that health care is fundamentally different from other sectors of the economy, and therefore incompatible with free-market principles.

Ezra Klein mistakenly cites the points of agreement between another writer and me (i.e., the ways in which free-market sectors of the economy are similar to health care) as describing why health care is different. Klein then goes on to say:
First, if you don't get good health care, you might die. That makes it hard for individuals to say no to things, it makes it hard for insurers to resist the backlash that comes when they say no to things, and it makes it hard for government to say no to things. And second, most health-care costs are subsidized by a third-party (employers for most of us, taxpayers for seniors and the poor), which means the people receiving the benefit aren't feeling the cost.
Klein’s second point was addressed in my earlier post, and also in Arrow’s original paper: third-party payment is a significant distortion, one that we would do well to reduce. Unfortunately, PPACA makes this problem worse.

That brings us back to the point that Klein and other liberal writers raise: health care is different because it involves life and death decisions. Yes, that is an unusual feature of some elements of health care, but not all: indeed, not most. For example: going to the dentist is rarely a life-or-death decision. Getting a hip replacement isn’t a life-or-death decision. Using a branded blood pressure drug, instead of an older generic one, is rarely a life-or-death decision. Getting an allergy shot to get through the spring pollen season is rarely a life-or-death decision.

A patient diagnosed with hormone-resistant prostate cancer, for which there is no cure, is going to die no matter what. Should that patient be given a $90,000 therapy that might extend his life by an average of four months? This, too, is not a life-or-death decision. It’s a death-or-death decision.

It turns out that the true range of life or death decisions in health care is rather narrow. If a poor woman gets hit by a bus and is sent to the ER, we all agree that America should come together and pay for that woman’s care: and, in fact, we do pay for it. If a physician makes a mistake, causing a patient to die or suffer disability, we have malpractice litigation for that—i.e., this is a problem upon which government-subsidized health care has no impact.

It would benefit those who believe that health care is incompatible with the free market to refine their arguments. A stronger liberal argument for socialized medicine would be: let’s let the free market reign in those areas of health care that are most like the rest of the market economy (i.e., non-catastrophic and elective care), and instead focus on socializing the aspects of the system that are most unlike the rest of the economy (i.e., catastrophic care).

Such an argument would begin to converge with conservative calls for consumer-driven health plans. CDHPs seek to achieve something quite similar to what I describe above: they put cash, in the form of tax-free health savings accounts, in the hands of individuals to pay for routine health expenses, while still insuring against catastrophic illness or injury. CDHPs continue to be refined, and are prevented from innovating further by unwise regulation, but they represent the best attempt thus far to segregate the most market-oriented aspects of health care from the least market-oriented. I would welcome liberal thoughts on how to achieve the same.

6 comments:

  1. 1) Mortality for total hips is about 0.2%. How many other things do we do with such a high mortality risk? Depending on how you define it, mortality for major surgeries runs around 0.5-2%. Of course, you do numbers for a living. I like numbers. When I tell a mother that her child has a 1 in 100,000 risk of dying when I take away her infant, what do you think she hears? I know what a lot of them hear since we regularly get complaints that we told someone there kid might die.

    2) There are concerns besides mortality. Paralysis (most young men in particular really fear this one), prolonged ventilation, loss of vision (big one now with all of the back surgeries), impotence and pain. I take care of lots of kids for MRIs. These moms are scared. The potential results scare them and having their kids anesthetized scares them. At least I assume that is why so many of them cry. (Actually, I often ask, so I am not just assuming.)

    "It would benefit those who believe that health care is incompatible with the free market to refine their arguments. A stronger liberal argument for socialized medicine would be: let’s let the free market reign in those areas of health care that are most like the rest of the market economy (i.e., non-catastrophic and elective care), and instead focus on socializing the aspects of the system that are most unlike the rest of the economy (i.e., catastrophic care)."

    I strongly agree with the first part here. Outpatient (non-procedural) care and much chronic care could respond well here. I disagree with just the catastrophic part. I think that most major surgeries do not fit well. Many of the more expensive tests do not apply. Others seem like they could go either way, so I would prefer to run pilots to see.

    BTW, we seem to have a fundamentally different view of markets. I view them as our best, most accurate pricing mechanism. You seem to view them as the way to the lowest price. Am I misrepresenting your belief?

    Steve

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  2. Avik
    To advance the discussion, can you get a bit more data driven.

    What percentage of health expenses could be categorized as discretionary versus non, ie, responsive to consumer directed decisions?

    Factor in EOL care, dual eligibles, low SES, folks with >5 chronic diseases (all not mutually exclusive), and those where high impact decision making may be moderated a bit for reasons related to sophistication, cognitive ability, etc.

    Contradictorily, what level of spending could potentially accrue to engagement in shared decision making, patient directed care, and ability to participate in delivery process?

    Opinions and conjecture wont advance discussion, not that I am putting any numbers on the table, but what data have you come across to parse out?

    Thanks
    Brad

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  3. "and those where high impact decision making may be moderated a bit for reasons related to sophistication, cognitive ability"

    Add in emotional difficulties, acute and chronic. Some days it seems like all of my patients are taking anxiolytics and/or anti-depressants.

    Steve

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  4. Hi guys,

    1. The fact that some decisions may have emotional components do not disqualify them from being functional in a free market.

    2. The fact that dumb (or unwise) people make bad decisions, also, is true in every field of human endeavor. Freedom means giving people both the freedom to be smart and stupid.

    3. Markets are an accurate pricing mechanism, and also the best way to drive prices as low as sustainably possible. Markets have many other salutary features -- most importantly, that they are driven by voluntary decisions.

    4. Brad -- you're right to ask the quantitative question. It's something worth exploring, once we have firmly established how to segregate the categories of spending. There are plenty of data sources one can use to make the required calculations, but first I want to spend more time on the philosophical question of what should be in which bucket (something that we are currently debating).

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  5. ". The fact that some decisions may have emotional components do not disqualify them from being functional in a free market.

    2. The fact that dumb (or unwise) people make bad decisions, also, is true in every field of human endeavor. Freedom means giving people both the freedom to be smart and stupid."

    You are contending that even in a market where a large percentage of people, in my experience probably a majority, either do not understand what they are buying, or under sufficient emotional duress to affect decision making, will still be able to create an efficient market? I think if you start back with Smith, we see markets working very well as he observed, but then people did not buy things that were not understood. I believe that has changed. I also believe that we have many examples of emotional responses driving markets to irrational or exaggerated responses. However, I would be interested in other people's ideas. Would you mind if I asked this question of a few of the econ bloggers like Cowen or Kling?

    Steve

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  6. Hi Steve,

    Not sure that you are completely understanding the concepts -- which isn't your fault because I haven't directly articulated them. I was planning on doing so anyway in a future post, so stay tuned.

    Broadly speaking, in a free market, people buy things with the information they have. If they don't have enough information, consumers naturally gravitate to those sellers who provide the most information. Where necessary the government can help aid efforts at disclosure and transparency (the SEC is a good example of this).

    Stupidity is not sufficient reason to void the free market, nor is emotionalism. If I buy my daughter a puppy, purely for the reason that she is begging me for one, even though I know the puppy is going to be a big pain the butt to take care of, this may be an emotional decision, but the fact that it is emotional is not sufficient justification for a government takeover of the puppy market.

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